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When Technology Meets Regulatory Compliance

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Marc talks about the evolution of banking technology and how disruptive technologies are set to take centre stage in the RegTech/CLM space.

Recently I was asked to outline the status of client onboarding and regulatory technologies in the Banking & Financial Services sector and to define what the future of RegTech looks like. Ultimately, banking technology has changed radically in the last decade, and this pace of change has accelerated even further in the last 3-5 years, with the emergence of new disruptive technologies, FinTech & RegTech players. In many cases this change has been driven by regulatory demands, the need to reduce costs/improve margins and the never-ending quest for Alpha. Ten years ago, we had the onset of the global financial crisis, the downstream effects of which are still being felt throughout the financial industry to this day. In the attempt to create a more transparent and accountable global banking system, new sets of regulations, as well as stronger enforcement measures, were put into place by banking and securities regulators in every major financial market. Further, the largest gap that the Lehman crisis highlighted was the opaqueness around client and counterparty data. Banks, at the time, could not unequivocally identify counterparties with the largest exposures. As a result, regulators have created and enforced new rules for knowing your customer (KYC) and identifying the ultimate beneficiary owners (UBO) of financial products.

Faced with a sea-change of new and strengthened regulatory compliance demands, banks responded in a very traditional manner: by aggressively hiring more compliance staff. This approach is counter-intuitive, when one considers the cost implications to the bottom line. However, the obligation to comply, the need to be more effective, and the opportunity cost in terms of client satisfaction and loyalty drove adoption of this model.

The need to lower compliance costs never went away and today we are witnessing a convergence between the need to manage regulatory obligations and the digital transformation taking place across every bank. This is the reason why RegTech and disruptive technologies have captured the banking imagination. Not only do they improve effectiveness, but they can directly help to reduce costs and improve margins, thus improving banking revenues.

Digital transformation efforts are also fuelled by the need to manage obligations more efficiently and effectively, and deliver a better, more engaged and more convenient client experience. Previously, these two goals were diametrically opposed – the inability to achieve internal efficiencies had a negative effect on external client experience.

Disruptive technologies will take more of a centre stage in the RegTech / CLM space as they are designed to add even greater automotive efficiencies which can enhance the bottom line and improve the client experience. Given their capacity to autonomously analyze high volumes of data, cognitive technologies such as AI and RPA are starting to play a much bigger role in automating routine tasks. The industry has already witnessed the benefits of using these technologies for compliance screening.

Blockchain and DLT technologies have the potential, especially as utility platforms within the industry, to enhance the compliance, data management and client lifecycle processes. As an example of the potential, the capability to reduce redundancy in providing client information to authorized institutions across the chain will not only streamline the onboarding process but will enhance the client experience.

After some initial hesitancy due to the question of security, cloud technology has witnessed a wider adoption by the banking industry. More and more banks are now embracing – and trusting – the cloud for client lifecycle management processes. Many are using a hybrid version of cloud (part on-premise, part IaaS / PaaS), as they explore this new terrain. In addition, some banks are extending cloud services to their customers, especially in the corporate, commercial and business banking arenas. In this secure online communication environment, banking customers now have the capability to update data and documentation related to their own risk profiles, request services, and access new products. Whether regulation enforcement eases, or even if some of the specific legislation is rolled back, the weaknesses of past operations processing have been revealed and can no longer be ignored. By adhering to best practices, banks will be safer, both independently and systemically and more efficient. The drive to digitalization and the requirement for regulatory compliance may be coming together at the exact right moment. As I mentioned earlier, the point at which digital and regulatory demand intersect, is where evolving banks will discover the most gains.